Honest economic thinking is more important than “New” Economic Thinking
from Dean Baker
Robert Kuttner reports about the dismal prospects for fundamental economic reform from the Institute for New Economic Thinking’s conference at Bretton Woods. His note suggests that the situation may be even worse than he realizes.
Toward the end of the piece he reports a discussion of the need by countries with trade surpluses to share in the adjustment process with countries with trade deficits. He then comments that:
“Nobody here is optimistic that the Chinese, the new surplus power, will allow anyone but the Beijing government to decide China’s monetary policy.”
Actually, it is possible for deficit countries to impose serious pressure on China to change its monetary policy. The United States Treasury could announce an official exchange rate that values the yuan much more highly than China’s official exchange rate. For example, it could offer to sell dollars at the rate of four yuan a piece. This would be a much higher price than the official Chinese rate, which is close to seven yuan to a dollar.
This would provide a powerful incentive for Chinese with any wealth to trade their yuan at the U.S. rate, putting upward pressure on the price of the yuan. Such trades would violate China’s laws, but there are wealthy individuals who don’t always follow the country’s laws (i.e. they have problems with corruption). If many people traded yuan for dollars at this higher value it could make this the new exchange rate.
People like Fred Bergsten at the 100 percent mainstream Institute for International Economics have been floating ideas like this for years. If the new economic thinkers gathered at Bretton Woods haven’t even considered such options, then prospects for reform are indeed bleak.
If you think any chinese, wealthy or not, is going to violate the law you dont know nothing about the people nor the country.
The only way is to “persuade” the Ch. Gov.
After all, Keynes suggested that adjustment should be done by surplus countries -not deficit countries. Adjustment of US dollar vis-a-vis china’s currency will have temporary effects. After all the US dollar has fallen against many currencies during the last 30 years-yet the US deficits has increased continuously. Such policy should also be followed by the World Bank and IMF in their relation with developing countries, avoiding pressure on deficit countries.
Keynes suggested a tax on surplus nations not the IMF debt based loans. It was the bankers who suggested that and they won and they destroyed the goals of Bretton Woods.
@Alice: This gets to the root of the dishonesty in mainstream economics, which blames Keynes for the debt crisis. The actual root is their static misinterpretation of Keynesian flow control. It is however possible that the bankers and their economists honestly didn’t understand Keynes, and that he left himself open to misinterpretation because he accepted their interpretation of money – as representing real (positive) value rather than IOU’s (i.e. debt).
Had Keynes approached policy with the understanding that money is an IOU, then he could have argued that, evidently, the banks create nothing they can charge interest on, and real credit is given by the community. (Indeed, since 1694 the monetary system has been based not on the saleability of gold but on its underwriting by the government on behalf of the community). There is thus no need for taxation. All that is required is that those who have acquired more credit than they need repay it to the community. They don’t need government to do that for them. Once upon a time honourable men built churches, schools, hospitals and other public buildings rather than show homes for themselves.
Even if Keynes had grasped this, his difficulty as a writer was that people can’t grasp too many new ideas at once. (After all, simple dynamics seems to have been beyond them). But what I am saying is that honest economics isn’t enough, even when it is new economic thinking. It also needs to be true in the sense that it enables differing interests to co-operate rather than compete, i.e. be harmonised through time rather than set permanently at war with each other. The appropriate places for competition are on the playing fields, in self-improvement and in improving the quality of life for others, as against the marketing of shoddy goods in pretty packaging.
I am not so convinced and tend to think good economics gets hijacked by powerful monetary interests far more often than history would want us to know. The great bankers and controllers of financial flows would prefer to see us argue for 50 years on whether Keynes was right or wrong than to admit they shafted him and his ideas well and truly at Bretton Woods. My understanding is it got pretty heated.
Dave,
even the whole argument that Keynesian policy “failed” in the 1970s was a massive beat up. It didnt fail at all. It wasnt even tried. The US went into the Vietnam war at full employment and kept on spending on bombs and military hardware. Thats not a Keynesian solution to anything. They pushed metal industry wages through the sky and the exchange rate system took over and so did award linked union wages in other industries and it was transferred across the globe and then came oil. Can anyone tell me which governments tried to squeeze that inflation with a good cut back (monetary and fiscal) like a good Keynesian government would have a lot earlier than they did?
@Dave: “The actual root [of the dishonesty in mainstream economics] is their static misinterpretation of Keynesian flow control.”
So I entirely agree with you, Alice, only I’m thinking in terms of causes and you are thinking in terms of effects. Yes, practical bankers (looking after themselves and caring nothing about theory) shafted Keynes at Bretton Woods; but economic theorists have enabled bankers to go on shafting us by building a static IS/LM relationship rather than motion control theory into the education of bankers and other economic technicians. There are, of course, none so blind as those who don’t want to see, but I still see little evidence of economists understanding control theory. Actually, Egmont Kakarot-Handtke (“Scrap the lot and start again” in PAER 56) has just introduced me to one who seems to: Hermann Meemken, whose recent “Systematic Market Theory: a new interpretation of Keynes”, is unfortunately still in German.
Incidentally, I thought a genuinely “good Keynesian government” would have squeezed inflation with fiscal rather than monetary policy, i.e. with investment and higher taxes controlled by government rather than the higher and lower interest rates used by bankers and the wealthy to enrich themselves by blowing and bursting bubbles. The governments who “are all Keynesians now” are partisan rather than patriotic: they dance to the tunes of their Party paymasters.